The government's £530m drive to get super-fast broadband to the UK's rural communities will fail unless more is done to encourage the biggest providers to reach the most remote customers, industry insiders have warned.

Jeremy Hunt announced funding for Northern Ireland, Scotland and the English county councils this week to bring broadband to every home and business in the country. But a pioneering council-run project which has used £90m of public subsidy to build a network in South Yorkshire is already running into difficulties.

Five councils will have built a fibre-optic super-fast broadband network reaching 80% of premises across the Sheffield, Barnsley, Doncaster and Rotherham areas by the end of the year, but none of the best-known internet service providers – BT, TalkTalk and BSkyB – have so far signed up.

Without them, demand from consumers looks likely to be so low that the consortium, Digital Region, may be forced to abandon the aim of selling to householders and focus its attention on businesses and the public sector.

"The local projects are failing. Take-up is very low because of poor marketing and the limited choice of internet service providers," claimed Piers Daniell, an entrepreneur whose company, Fluidata, connects some 40 of the smaller internet service providers (ISPs) into BT's network.

"The bigger ISPs are key to driving uptake in the regions because they have the brands people are familiar with, they have big marketing budgets and additional services like television and phone calls."

Linking into a small regional network means renting optical fibre to connect that region to an ISP's own servers, and many of them are based in London. It also requires money spent matching up computer systems so that the process of adding new customers can be automated.

Most internet service providers are not prepared to make the extra investment, even in an area like South Yorkshire, which has 40,000 businesses and 500,000 home users.

ISPs prefer to buy their broadband capacity from BT and at most one or two other networks, said Daniell, which meant many of the dozens of rural networks being funded by government subsidy could be ignored, unless they are built by BT.

If the government's money is well spent, remote villages in regions such as Cumbria and the Scottish Highlands, where it is currently hard to load a simple web page, should be able to download or stream high-quality movies by 2015.

But Digital Region has also run into difficulties with BT. The consortium runs its fibre to street cabinets, but relies on BT's copper wire to get the signal from the cabinets to individual premises. Telecoms watchdog Ofcom has been asked to intervene over the price BT charges to connect new customers – Digital Region is charged £127 per customer, while connecting a BT customer costs £75.

David Carr, chief executive of Digital Region, said: "We support the government's apparent desire to introduce competition into the super-fast broadband market, but we question how committed it is to creating the regulatory conditions in which that competition can flourish. In this respect, we're hoping that the price reduction recommended by Ofcom will bring pricing more in line with what BT charges itself internally."

Carr said council-run networks had considered clubbing together to form a single access point for ISPs which want to reach rural customers. Fluidata is hoping to offer this service on a commercial basis, and to advise councils as they build.

"Local authorities need more support in building networks that can be sold," said Daniell. "It's easier if we have got communication with the people building these networks while they are building them, rather than trying to fix them afterwards."